When Chancellor of the Exchequer Jeremy Hunt stood up to deliver his Spring Budget in Parliament today – just 105 days after his Autumn Statement – you would have been forgiven for wondering why it was time for yet another fiscal event. The economy has moved sideways since the autumn and the chancellor had no extra fiscal headroom. But with the election looming and his party crying out for tax cuts, this was a key moment for the chancellor.
In the event, the Budget was a mix of the good (new initiatives to boost public-sector productivity), the bad (short-term tax cuts) and the ugly (the post-election fiscal outlook). Unfortunately, the bad elements are coming out ahead, as short-term tax cuts continue to dominate the government’s fiscal strategy.
The combined impact of the 2p cut to National Insurance in both the Autumn Statement and the Spring Budget amount to an annual giveaway of £20 billion per year, or 0.7 per cent of GDP. To put that figure in context, £20 billion a year would be enough to pay for the equivalent of the whole Covid emergency-vaccination scheme three times over every single year. This is also more than 20 times the amount the chancellor has allocated to long-term investment to boost public-sector productivity and is a stark illustration of where the government’s priorities lie.
The only sustainable route to lowering the tax burden is to make the upfront investments needed to fundamentally reform the state and the way public services are delivered. The chancellor’s £4.2 billion plan to harness technology to boost public-sector productivity is a good down payment on realising this potential. But the scale of the investment – equivalent to 0.03 per cent of GDP over the next five years – will not be enough on its own to turn around the UK’s fiscal fortunes.
The government continues to put the cart before the horse, prioritising pre-election tax cuts over the long-term investment needed to boost growth, transform public services and create the fiscal space for sustainable tax cuts in the future. The bet is this strategy will improve the government’s electoral chances, but our recent polling indicates this may be bad politics as well as bad policy: only 11 per cent of voters say tax cuts are the best use of any fiscal headroom.
Radical action is needed to deal with the crises facing the UK. There are now 2.8 million people out of work due to long-term sickness, 40 per cent of the National Health Service (NHS) budget is spent on treating preventable diseases and the obesity crisis costs society £98 billion per year. Tax cuts will not solve any of these problems, but TBI’s proposed Protect Britain programme could. By investing in a tech-enabled adult health screening and early-treatment platform, the government could reduce the incidence of obesity and other health problems later in life, relieve pressure on the NHS, increase the proportion of people in work and support economic growth.
The Good: New Initiatives to Boost Public-Sector Productivity
The most compelling part of the chancellor’s fiscal strategy is his public-sector productivity review, launched in June last year, which aims to harness the power of technology to reignite public-sector productivity growth after 25 years of stagnation.
This plan, which is now backed by £4.2 billion of new funding over the next five years, is exactly the kind of long-term investment the UK needs. The NHS will receive an extra £3.4 billion to replace outdated IT systems and support its digital transformation – with the hope of helping to unlock £35 billion in productivity savings over the next Parliament. A further £800 million is allocated to tech-enabled initiatives across a range of other services with outcomes including faster MRI scans, sped-up processing of planning applications and reduced administrative burden on police offices. The Treasury’s cost-benefit analysis shows this investment is good value for money and should deliver an estimated £1.8 billion in productivity savings by 2029. Moreover, it’s aligned with what voters say they want: 64 per cent support investment in new technology to improve public services.
The chancellor also intends to prioritise more of this investment in the future. At the next Spending Review he will direct the Treasury to select investment proposals that within five years deliver annual savings equivalent to the total cost of investment required. This is a positive step that should help address some of the short-termism at the heart of the system.
However, the scale of the new package – equivalent to £840 million per year (or 0.03 per cent of GDP over the next five years) – is not sufficient. It is a step in the right direction when a giant leap forward is needed.
The Bad: Unaffordable Tax Cuts
The good elements of the Budget were somewhat overshadowed by the chancellor’s effort to deliver another pre-election tax cut. This ultimately materialised in the form of a further 2p cut to the basic rate of National Insurance contributions, which will cost the government around £10 billion per year and come into effect from 6 April. The chancellor also continued the tradition of Conservative chancellors since 2010 and extended the freeze on fuel duty (by another year, until March 2025) and extended the freeze on alcohol duty (from August 2024 to February 2025) – both clear pre-election giveaways.
The headline-grabbing cut to National Insurance was a smarter tax cut than in the Autumn Statement, as it was at least partly paid for by raising revenue from other sources rather than squeezing public spending even further after the election. Nevertheless, it has left the UK with:
A tiny fiscal buffer: Just £8.9 billion of fiscal headroom to deal with future shocks – the second lowest fiscal buffer since the Conservatives took power in 2010. The chancellor was able to pay for around half of the National Insurance cut by squeezing the fiscal buffer.
Higher taxes in some areas: New measures to raise revenue include higher tobacco duties and a new tax on vaping, raising air-passenger duty on business-class flights, and scrapping a tax break for second-home owners who rent out their property to tourists. He also partially adopted two of Labour’s tax plans: abolishing the non-domiciled status regime and replacing it with a system based on a four-year residency test (which will raise an estimated £2.6 billion by 2028-29) and extending the energy-profits levy on oil and gas companies by another year (which will raise an estimated additional £1.2 billion in 2028-29). Overall, these measures will pay for around half of the National Insurance cut.
Further austerity still planned in the future: The chancellor chose not to extend his planned squeeze on public services. Nevertheless, day-to-day spending is still set to rise by only 1 per cent per year in real terms over the next Parliament. If the government continues to protect spending on the NHS, education, defence, child care and official development assistance, this implies real-terms cuts of around 10 per cent after the election for unprotected departments. These austerity-level cuts apply to one-third of day-to-day spending and cover areas such as transport, justice, policing and housing. The chancellor also still assumes that public-sector investment will fall by 10 per cent in real terms in the four years after the election.
The government does not have a detailed plan to deliver these spending cuts while maintaining or improving the quality of already stretched public services. Vague promises that point to the potential for public-sector productivity to solve the problem are not credible; tax cuts should follow gains in public-sector productivity only after they materialise, not the other way around.
The Ugly: The Fiscal Outlook After the Election
The net result of all these changes has done little to improve the UK’s fiscal outlook, which is essentially unchanged from November. The government’s headline measure of public debt is still set to rise in the first half of the next Parliament – peaking at 93.2 per cent in 2027-28 – and still rests on unrealistic tax and spending assumptions (as we outlined in November).
Moreover, the political and fiscal capital the chancellor has spent to engineer the latest round of tax cuts – including adopting part of Labour’s revenue-raising strategy that the government has previously chastised – illustrates the fiscal bind that the UK is in and foreshadows the difficult choices that future governments will face.
Taxes will need to rise after the election. The chancellor’s own fiscal plans already include post-election tax rises as the temporary cuts to fuel duty and stamp duty are set to reverse in March 2025 and the freeze on income-tax thresholds is set to continue, which will lead to more people paying higher rates of tax in the future. These tax rises will increase the tax burden by 1 percentage point to reach 37.1 per cent of GDP by 2028-29 – its highest level since 1948 – but even these rises still assume severe cuts in public spending in some areas. To avoid austerity, the next government will have to find more resources for public services. The chancellor’s recent tax cuts will therefore likely need to be undone.
The Opportunity Ahead
The chancellor has left a difficult inheritance for whoever holds the keys to Number 11 next year. The only sustainable route to lowering the tax burden is to make the upfront investments needed to fundamentally reform the state and the way public services are delivered.
The next election will be won by whoever offers a credible way out of the UK’s current malaise. A brighter future is possible, but it requires transformational change to the way public services are delivered.
Lead image: Getty